Tricon Residential, a Toronto-based owner and operator of a growing portfolio of single-family rental homes in the U.S. Sun Belt, is going to market this week looking to raise $452.6 million through a mortgage-backed securitization offering.
The offering comes at a time when bond rating agencies are projecting growing headwinds in the single-family rental sector. Moody’s Investors Service and Kroll Bond Rating Agency have issued preliminary ratings on the offering, Tricon Residential 2023-SFR1.
Exposure to formerly hot housing markets where prices are pulling back, along with higher interest rates after a period of historic lows, are considered “credit negative” for U.S. single-family rental residential mortgage-backed securities, Moody’s Investors Service said Tuesday in a new report.
Concentrations in formerly hot markets with declining prices increase collateral risks, Moody’s said. Transactions with nearer-term loan maturities have more accumulated appreciation and rent growth, and borrowing costs that will be easier for sponsors to match or improve.
However, deals issued in 2021 and 2022 face heightened risks because they featured high leverage enabled by lower rates at issuance and have not benefited as much — or at all — from the pandemic-era boom in home values, according to Moody’s.
Since mid-2022, the single-family rental sector has faced other headwinds too for the first time, according to KBRA. Decelerating rental rates have produced the most challenging environment for the sector of the past decade.
The sector went through a period of high rent growth from April 2021 to August 2022, according to KBRA. However, the market has recently experienced downward rental pressures, with market rents declining 0.3% per month on average between September 2022 and February.
Tricon Residential 2023-SFR1 is a single-borrower, single-family rental securitization that will be collateralized by a $452.6 million loan from Morgan Stanley Mortgage Capital Holdings secured by first priority mortgages on 2,116 income-producing single-family homes, according to KBRA.
Tricon is using the proceeds from the new securitization to pay off existing debt.
The fixed-rate loan requires interest payments only over its five-year term. The subject transaction will be the 10th KBRA-rated securitization issued by Tricon.
The underlying single-family rental properties are in or near 36 markets across nine states. The top-three markets include Atlanta, 11.1% of the portfolio; Charlotte, North Carolina, 9.2%; and Phoenix, 9.1%.
Tricon declined to comment to CoStar News.